Platform economy & how does it work

The scope of platforms’ influence is so great that we often speak of the platform economy today

Platform economy & how does it work. Source: shutterstock.com

United we stand, divided we fall. That’s the motto of modern small and middle-sized businesses. In fact, they have good ground to stand on, or should we say – a good platform. Digital platforms are common ground and a meeting point for billions of merchants and their consumers, businesses and their partners. The scope of platforms’ influence is so great that we often speak of the platform economy today.

What is platform economy

A digital platform is not a product itself. It is built on cloud technology to serve or enable other products or services. One of the best definitions in the business model context is this:

“A platform is a plug-and-play business model that allows multiple participants (producers and consumers) to connect to it, interact with each other and create and exchange value.”

This model is technology-driven. It facilitates exchanges between multiple groups creating a network effect. The value created is proportional to the size of the community which can be enormous since a platform business model can scale massively to address millions of consumers without performance degradation.

Platforms that enable a platform business model have associated business ecosystems. They typically expose their capabilities to members of those ecosystems via APIs. This way, a platform shares data with third-party developers to create new services and extend the ecosystem.

They typically expose their capabilities to members of those ecosystems via APIs. Source: shutterstock.com

Digital platforms are at the peak of popularity today. They create consumer markets of enormous scale and efficiency. Furthermore, they enable new levels of collaboration between companies from different industry sectors that can result in the next wave of technological and social disruption, economic growth and breakthrough innovation.

It is no wonder, then, that when we speak of the platform business model, we mention companies that don’t need an introduction such as Google, Facebook, Twitter, Instagram, LinkedIn, Amazon, Spotify, Uber, BlablaCar, AirBnB, Etsy, eBay, etc.

Struggling to define the transformations within a digitally based new economy, people have called it the creative economy, the sharing economy, or the gig economy. Nowadays, the term platform economy is trendy. It is a more neutral and generalised term that encompasses a growing number of digitally enabled activities in business, politics, and social interaction.

Roughly speaking, a platform economy means economic and social activities facilitated by platforms whose owners are seemingly developing unprecedented power and control over numerous segments of consumer markets. Their success is based on the digitisation of value-creating human activities.

Their success is based on the digitisation of value-creating human activities. Source: shutterstock.com

A recent KPMG study estimated the size of the platform economy at more than $7 trillion.

The United States, China, the United Kingdom, India and Germany top the rankings of those countries with the biggest opportunity to grow and scale digital platforms. They will presumably retain their top-five ranking in 2020. Countries such as Italy, South Africa and Russia currently lag behind.

Why is it so popular?

The trend toward platform adoption is spreading with the speed of light. And for a good reason. The advantages of the platform business model are numerous:

Platforms can create new sources of income and reasonably compensated work, facilitate innovation, and provide protection for their clients.

Platforms can facilitate innovation. Source: shutterstock.com

Nevertheless, numerous discussions arise as to whether the platform business model is disrupting the economy in the right way. A few valid concerns include:

Gig workers in a platform economy do not have legal status, access to welfare benefits or power of the trade unions.

Large platforms virtually monopolise the relevant markets.

Sharing platforms may significantly reduce the growth of other spheres such as car production, hotel business, traditional financial institutions.

How it works in finance

Platforms are the fresh battleground for financial services providers. Platforms offering lending products are currently enjoying strong consumer growth. For instance, Lending Club’s loan amount grew 21% in 2018, as their charge-off percentage declined from 7% to 1%. Credit Karma has grown from 4 million users in 2012 to 80 million users in 2018.

Digital wallet products from the platform-based companies such as Google, Apple, Facebook and Amazon (“GAFA”) as well as Baidu, Alibaba and Tencent (“BAT”) present very strong competition to digital players like Paypal, as well as traditional banks. In India, Flipkart has added a mobile wallet to its e-commerce platform, and mobile payments platform service, Paytm, has obtained a banking license in addition to its own e-commerce service.

In India, Flipkart has added a mobile wallet to its e-commerce platform. Source: twitter.com

Consumers used to their enhanced online shopping experiences also consider platform-owners to be good wealth-managers. A recent survey showed that 20% of respondents would consider keeping their savings with Amazon or Google if those companies offered a savings account. Among those consumers surveyed who are already comfortable with online-only providers, even more (79%) would consider saving with a big tech company if they could.

The integration and processing capabilities offered by platforms require banks and other traditional service providers to reshape their standard marketing practices. In particular, in order to compete on platforms, financial services marketers will need to master a few critical skills:

Data offsourcing – marketers will no longer need to bring data from various sources in-house but will incorporate external data sources in their own databases to dynamically use platform-sourced data in their analytical models.

Programmatic selling – financial services providers should leverage technology to establish product fit. The accent of marketing will shift from advertising to interaction. Mere visuals are not enough anymore. New kind of selling will involve automated bidding within a real-time, AI-driven conversation with a customer or prospect.

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